What’s ailing the rupee this year and what lies ahead

livemint.com:

Policy doubts Market expectations and Fedspeak have not aligned well after the interest rate pause. Federal Reserve officials have warned against assuming that the pause signals the end of the monetary tightening cycle. Yet, in the days after the Fed decision, expectations of lower rates have only become stronger.

stronger. The pattern of downward shift in futures rates reflects the view that central banks have finished hiking, and will start cutting rates by mid-2024. But there is no guarantee to that.

Robust economic growth in the US does not justify rate cuts, and its $1.7-trillion (and rising) budget deficit will probably make it harder to sell Treasury bonds at low yields. In contrast, the cooling job market supports an easing in interest rates. Therefore, there is uncertainty about the direction and timing of rate cuts, which imperils emerging market currencies.

International capital is likely to remain risk-off and invested in safer and high-coupon US debt rather than shift to markets such as India. Pre-election jitters The rupee has depreciated before each of the past three general elections. If this trend is maintained, then some weakening of the exchange rate is likely in the months leading up to Lok Sabha elections in April-May 2024.

Elections create an environment of uncertainty. Perceived risks include the formation of an unstable coalition government, existing policies being discontinued or even overturned, and excessive pre-election expenditure to woo voters that could worsen the fiscal deficit. Investors react to political uncertainty by becoming cautious.